For most goods of a modern economy, the traditional rule that the price ideally equates marginal costs of production is not economically viable. The reason for this is that initial costs of product development, design, and marketing account for major parts of total costs while the marginal costs of production are often comparatively low. Setting prices equal to marginal costs would drive producers to bankruptcy due to revenues that are too small to cover the costs of product development. (One example for this is computer software: Product development can be high, but serving one additional customer over the Internet costs only a few cents.)
However, setting prices above marginal costs has several serious disadvantages: First, it will exclude potential buyers only because their willingness to pay is lower than the asked price, even if their willingness to pay is higher than the corresponding marginal costs of production. Second, recent research in microeconomic theory of markets for differentiated goods has also shown that uniform prices result in an oversupply of product variety and an undersupply of product quality. This multiple market failure results in (1) goods' prices that far exceed those prices that would need to be paid in a welfare optimal equilibrium, (2) suboptimal freedom to use the existing variety of goods, and (3) suboptimal product quality. (Compare, e.g., Economides 1993; Salop 1979; Waterman 1990.)
One way to solve the aformentioned problems is to charge differentiated prices, so that no one will be excluded without economic need, meanwhile generating sufficient revenue to cover costs. Several methods of price discrimination, classified according to Arthur Cecil Pigou as Second or Third Degree Price Discrimination, are known to the field of economics. Although they are mostly superior to uniform pricing, all of them have serious limitations as to facilitate a welfare optimal equilibrium of prices, variety, and quality of products and to facilitate access of all consumers that are normally excluded by uniform pricing.